Jan 13, 2020
How Was Bitcoin Born?
By Sana Uqaili on The Capital
Let’s take some time to really understand what stands behind blockchain technology and how it allows us to create and work with digital money.
Blockchain technology is commonly referred to as the Internet of money or value. But let’s take this journey step by step. I would like to start by giving you a short account of the chain of events that led to the emergence of Bitcoin — the first globally recognized application of blockchain technology.
The Bitcoin whitepaper was published in October 2008 — the year when the global economic and financial crisis hit the world. Coincidence or not, Bitcoin seems perfectly designed to address many deficiencies of fiat money. Perhaps, a little-known fact is that the genesis block of the Bitcoin blockchain, where its first transaction is recorded, contains a hidden message by its creator Satoshi Nakamoto. The text quotes a headline from the British newspaper “The Times,” thus showing a proof of the date when the Bitcoin blockchain was launched and goes on as follows.
“The Times; 3rd of January 2009; Chancellor on brink of second bailout for banks”
Besides proving the date of the genesis block, this message seems cleverly designed to express the tragic state of the global financial system at the time. It also implies the importance of the proposed solution as a stepping stone towards an improved monetary system. Being embedded in the genesis block and given the immutable and robust nature of the Bitcoin blockchain, that message stands there as an everlasting reminder for future generations.
Our core goal here is to understand how blockchain functions and why Bitcoin became so popular. However, in order to do that, we need a quick recap of some macroeconomic events that took place in recent history. Since the dissolution of the Bretton Woods agreement in 1971, and the introduction of the modern fiat currency system, the world has entered a new era of mostly freely fluctuating foreign exchange rates. National central banks started implementing various monetary policies to manage money supply in their respective economies. Monetary policy objectives may have had various nuances around the world, but a common widely accepted theme has been inflation targeting. This is done in order to provide a healthy stable low inflation rate facilitating sustained economic growth. By targeting low inflation rates, central banks around the world aim to create stable economic conditions providing the right incentives for consumers’ and businesses’ economic activity in the absence of huge price swings up or down.
This strategy has had varying degrees of success throughout the years and across different countries. In the same period, there has been unprecedented credit growth and accumulation of debt globally, which led to the sub-prime mortgage crisis, credit crunches around the world, and the global economic recession. When banks started failing, and investments in new economic ventures decreased, governments and central banks around the world realized that they need to do something in order to stimulate the economy, and hence started rounds of “Quantitative Easing”, frequently abbreviated as “QE”. This resulted in an unprecedented supply of new fiat money entering the economy and close to 0 and in some cases even negative interest rates, which is another economic phenomenon unheard of in standard economic theory and practice.
The idea of printing so much money was to stimulate the economy and save the financial system from collapse. However, as it happens frequently, there were also some side effects of such policies. The prices of real and financial assets like global equities and real estate rose significantly, thereby debasing the “store of value” aspect of fiat currency. Social inequality has also increased meaningfully since the global recession. This is again due to the huge amount of liquidity or new money supply entering the global financial system, and pouring into asset classes such as real estate, stock markets, and venture capital. This, of course, inflated their prices.
As these asset classes are normally accessible mostly to wealthy investors that use the services of savvy asset managers, the net effect was a growing wealth gap. On the other hand, the majority of people with little or no investable assets, whose income is based mostly on labour wages, haven’t nearly experienced the same wealth effect. This has probably had implications on the global political landscape in recent years, but since political economics is not our scope here, we’ll leave that for another discussion. Long story — short, in the midst of such unprecedented and critical events in the global economic and financial landscape, Bitcoin was born.
